COURT FILE NO.: 211-08

DATE: 20081117

SUPERIOR COURT OF JUSTICE - ONTARIO

(DIVISIONAL COURT)

RE: anthony mascia & northern magnetic corporation v. dixie x-ray associates limited, cedarwood management and financial consultants Inc., cirrus management incorporated, karing management limited, sadara management corporation, daniel slipacoff, allan yee, kwan cheung tsui, isadore czosniak, ron polson and soe lwin kYone

BEFORE: Cunningham, A.C.J., Carnwath, J. and Bellamy, J.

COUNSEL: Barry H. Bresner & Markus Kremer, for the Respondents/Appellants, Dixie et al.

Lisa S. Corne, for the Applicants/Cross-Appellants, Anthony Mascia & Northern Magnetic Corporation

HEARD AT TORONTO: November 12, 2008

E N D O R S E M E N T

BY THE COURT:

[1] This is an appeal and cross-appeal from a decision of Madam Justice A. Hoy dated March 25, 2008.

[2] Dixie et al. (“Dixie”) appeal the finding that the last sentence of section 21(d) of the shareholders agreement was an unenforceable penalty clause. Dr. Anthony Mascia and Northern Magnetic Corporation (“Dr. Mascia”) cross-appeal the denial of a request for an adjournment, the refusal to grant an order directing that the application proceed to trial, and the finding that there had been no oppression.

[3] For reasons that follow, the appeal is allowed and the cross-appeal is dismissed.

The Appeal

[4] Justice Hoy concluded that the last sentence of section 21(d) of the shareholders agreement was unenforceable because it was a penalty and that “it would be unconscionable or seriously unfair, in the circumstances of this case, at the time when the clause is relied on, to enforce the clause as written.” In the appellants’ favour, she concluded that Dixie was entitled to conduct the forced buy-out of Northern’s shares, that Dr. Mascia was in breach of the shareholders agreement for failing to resign, that Dixie was entitled to recover provable damages for the breach, and that there was no oppression within the meaning of the Ontario Business Corporations Act.

[5] There were no facts in dispute about the content of the section in the shareholders agreement or the circumstances under which Dr. Mascia agreed to it. The only question was one of interpreting the section in relation to the law regarding penalty clauses.

[6] Dixie submits that the standard of review for a question of law is correctness. Dr. Mascia submits that the setting aside of the section was based upon the exercise of Justice Hoy’s discretion which emanated from her power to grant an equitable remedy against a penalty. As such, it must be shown that the discretion was exercised arbitrarily or capriciously, or was based upon a wrong or inapplicable principle of law rendering her conclusion clearly wrong.

[7] The decision with respect to the interpretation of the last sentence of section 21(d) of the shareholders agreement is a question of pure law and the standard of review is one of correctness. The Supreme Court of Canada most recently addressed the standard of review of an appeal from a judge’s decision in Housen v. Nikolaisen (2002), 2002 SCC 33, 211 D.L.R. (4th) 577 (S.C.C.), at para. 8:

On a pure question of law, the basic rule with respect to the review of a trial judge's findings is that an appellate court is free to replace the opinion of the trial judge with its own. Thus the standard of review on a question of law is that of correctness.

[8] The onus of proving that a clause is a penalty lies with the party alleging the clause is a penalty. That party must prove that the clause is a penalty with regard to the circumstances at the time of formation. Then, if the clause is found to be a penalty, the party must prove that enforcement would be unconscionable at the time it is invoked, that is, that the penalty is “extravagant and exorbitant in comparison with the greatest loss which could conceivably have flowed from the breach”: Infinite Maintenance Systems Ltd. v. ORC Management Ltd.,[2001] O.J. No. 77, para. 13 (Ont. C.A.).

[9] In our view, the application judge should have started with the proposition that the section was prima facie enforceable and that there was a presumption that the section was a genuine pre-estimate of damages. The onus to displace that presumption rested with Dr. Mascia. He, not Dixie, was the one who was required to demonstrate that the last sentence of section 21(d) did not represent a genuine pre-estimate of damages at the time he entered into the shareholders agreement and, further, that it would be unconscionable to apply the last sentence of section 21(d) on the facts of this case.

[10] Dr. Mascia adduced no evidence to prove that the section was either a penalty or that it should be unenforceable. He also failed to prove either that the reduction in the purchase price required by section 21(d) was not a genuine pre-estimate of damages or that its enforcement would be unconscionable.

[11] While not required to do so, Dixie did present evidence in support of the presumption that the section was an enforceable clause for liquidated damages. Its evidence was uncontested and established that Dixie’s loss in income resulting from Dr. Mascia’s decision to remain at Humber River Regional Hospital (“HRRH”) was approximately $400,000 per year resulting in $1.2 million for the three years during which the agreement prohibited him from working at HRRH.

[12] The application judge appears to have reversed the onus and to have placed it on Dixie instead of on Dr. Mascia. It was an error for the application judge to have misplaced this onus and to have assumed that the reduction in the purchase price was greater than Dixie’s losses.

[13] Further, even if Dr. Mascia had discharged his onus, the section would still have been enforceable unless he could prove that applying the clause would be unconscionable in the circumstances of this case. Hoy, J. did find that Dixie’s actions were not oppressive within the meaning of s.248 of the Ontario Business Corporations Act; yet she provided no reasons for her conclusion that “it would be unconscionable or seriously unfair” to enforce the section as written.

[14] Generally, courts will not interfere with an agreement made by sophisticated parties acting at arms’ length and, in particular, will not set aside a shareholders agreement “that has been entered into in good faith by experienced persons who have had independent legal advice”: Kabutey v. New-Form Manufacturing Co., [1999] O.J. No. 3635, at para. 12 (S.C.J.). Where parties have agreed upon a formula for determining the price at which departing shareholders will be bought out of a company, the expectation is that they will live with that formula.

[15] When he entered into the shareholders agreement, Dr. Mascia had the benefit of both independent legal advice as well as independent financial advice. He negotiated the terms on which he was prepared to invest in Dixie. The evidence disclosed that without the protection afforded by the section, the price paid by Dr. Mascia and the six other Dixie shareholders may well have been less, to reflect the anticipated losses that would result if departing shareholders were free to continue to compete for work at HRRH with Dixie’s radiologists.

[16] There was nothing unconscionable in holding Dr. Mascia to the bargain he voluntarily made when he signed the shareholders agreement, an agreement that applied equally to all seven shareholders, each of whom would also be bound by the section. Indeed, in our view, it would be inequitable for the Dixie shareholders who had the value of their shares protected while they were shareholders to now deny that same protection to Dixie’s remaining shareholders, each of whom bought their shares at a value which presumably reflected their position.

[17] The section neither prohibited Dr. Mascia from continuing to work at HRRH nor anywhere else. It simply imposed a reasonable economic consequence for doing so by offsetting a loss of income that Dixie would suffer as a result of Dr. Mascia continuing to practice at HRRH in direct competition with Dixie. It was entirely within his power to avoid the reduction by resigning from HRRH.

[18] In the result, the appeal is allowed and paragraph 2 of the judgment is overturned. The ultimate result of this decision, and what follows, is that Dr. Mascia’s application is dismissed in its entirety.

The Cross-Appeal

[19] For reasons given at the hearing of the cross-appeal, the cross-appeal to set aside paragraph 1 of the judgment was dismissed. We concluded that the motion for an order adjourning the application and converting it to an action was an interlocutory motion which required leave to appeal pursuant to Rule 62.02 of the Rules of Civil Procedure. Leave to appeal had not been sought.

[20] Dr. Mascia also cross-appealed paragraph 3 of the judgment whereby Hoy, J. dismissed the balance of the oppression application under section 248 of the Ontario Business Corporations Act. Citing twenty-six grounds of appeal, Dr. Mascia sought an order directing that the application be converted into an action and proceed to trial on certain terms.

[21] Dr. Mascia has not specifically addressed the standard of review to be applied on his cross-appeal.

[22] In Housen (supra), the Court held that the standard of review of a judge’s findings on a question of law is correctness, while a judge’s findings of fact can be reversed only if the judge’s decision evidences a “palpable and overriding error.” This statement has been interpreted as requiring a decision to be “clearly wrong” in the sense of being “not reasonably supported by the evidence”: H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401 at para. 110. Justice Hoy’s findings of fact cannot be reversed unless she made a palpable and overriding error. We see no such error.

[23] To the extent that Hoy, J. formulated the legal test for deciding whether there was oppression, the test is one of correctness. Again, we see no error that would require us to substitute our own conclusion.

[24] This was an oppression application. In such an application, the burden of proof rests on the party seeking relief which, in this case, was Dr. Mascia. Dixie was not required to prove that it did not act oppressively.

[25] Justice Hoy carefully reviewed all the affidavit material and the exhibits before her. It is true that she was presented with conflicting affidavits. That was because the parties elected not to cross-examine on the affidavits. In particular, Dr. Mascia chose to proceed by way of an application; he chose not to cross-examine any witnesses on their affidavits; he chose not to provide any evidence other than his own; and he chose not to call anyone from Ernst & Young. Dr. Mascia was bound by those choices.

[26] Justice Hoy vigilantly examined the affidavits and analyzed each issue with respect to whether any conflicting evidence was material to her conclusion and whether any discrepancy made it necessary for any part of the application to proceed to trial to determine the issue. Repeatedly, she reviewed each inconsistency in the context of the legal issue requiring determination. In every case, after thoughtful analysis, Hoy, J. concluded that the conflicting evidence was not material to the facts in dispute and did not make it necessary to proceed to trial.

[27] Throughout, Justice Hoy correctly considered the reasonable expectations of the shareholder parties. Having considered the evidence that the books and records were open to Dr. Mascia, that financial information was provided to him and his accountants on request and in a timely manner, that there was nothing untoward in the manner in which expenses were charged to Dixie, that the 2006 valuation was fair, and that Dr. Mascia’s allegations were fully answered by Dixie’s evidence, Justice Hoy correctly found no oppression. We see no reason to interfere with her conclusions.

Motion for Fresh Evidence

[28] Dr. Mascia brought a motion for an order permitting the introduction of fresh evidence on the appeal and the cross-appeal. The fresh evidence consisted of two affidavits from Dr. Mascia and one from an accountant at Ernst & Young LLP. In bringing this motion, he argued that this is new information that came to him only after the release of Justice Hoy’s decision and that it is necessary in order to deal fairly with the issues on the appeal. Declining to admit this fresh evidence, argued Dr. Mascia, would lead to a substantial injustice.

[29] Having permitted the late filing of a considerable amount of material, and having heard lengthy argument on this matter, we dismiss this motion despite the able submissions of Ms. Corne.

[30] There was, in fact, no new evidence. At most, Dr. Mascia made many new allegations of wrongdoing, some of them criminal in nature. He then summonsed certain individuals for examination because they would neither repeat their allegations nor would they provide affidavits in support of his motion for fresh evidence. Much of what he alleges was based on rumour, speculation and unfounded allegations; no evidence was put before us that would prove the allegations he made. To the contrary, Dixie’s countering affidavit evidence and, in particular, the supporting materials, disprove the allegations.

[31] The Court has the discretion to admit fresh evidence. The test for such admission is set out in R. v. Palmer, 1979 8 (SCC), [1980] 1 S.C.R. 759 and was recently discussed by this Court in Tomaszewska v. College of Nurses of Ontario, [2007] O.J. No. 1731 at para. 8 (Div.Ct.) We find that the material Dr. Mascia seeks to introduce as fresh evidence does not meet the test for the introduction of fresh evidence, nor is this a case where the interests of justice call for the admission of the fresh evidence. It is not required to determine whether the business affairs of Dixie were carried out in a way that were oppressive or to determine whether any of Dr. Mascia’s interests were unfairly disregarded or prejudiced.

Motion to Strike Allegations and an affidavit

[32] Dixie moved to strike paragraph 22 of Dr. Mascia’s affidavit and to strike out the affidavit of Ms. Corne’s articling student. Ms. Corne quite properly agreed to withdraw both of these, so they are no longer before us.

Motion to Quash

[33] Dixie brought a motion to quash three summonses issued under Rule 39 on behalf of Dr. Mascia. Given our decision with respect to the cross-appeal, this motion is moot. Had it not been moot, we would have granted the motion on the basis that finality was required and it was improper to examine witnesses at this stage of the proceeding for the collateral purpose of seeking to obtain new evidence.

Costs

[34] If the parties cannot agree on the costs of these appeals and motions, Dixie may make brief written submissions within ten days of the release of this decision. Dr. Mascia will have five days to reply. All submissions are to be made through the Divisional Court office.

Cunningham, A.C. J.

Carnwath, J.

Bellamy, J.

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